Raj-podge Trading Scheme No Mosaic Method

The jury’s verdict is in, and it has found Raj Rajaratnam guilty on all 14 counts. Preet Bharara is gloating and lead prosecutor Jonathan Streeter has won a formidable battle in his biggest case yet (although the defense will certainly appeal.)

But what, one must wonder, does the verdict mean for the future of the “mosaic theory” defense? This, after all, was what Rajaratnam’s defense team argued that the hedge fund manager was doing: examining the nuances of already-public information and then making trades based on his research. But rather than rendering a verdict on the research method, attorneys say the jury’s decision only emphasizes that what Rajaratnam did was not the mosaic method.

“Once you’re in possession of material non-public information the mosaic theory no longer applies,” said David Siegal, a former federal prosecutor who is now a partner in the white collar criminal defense practice group at Haynes and Boone. “In his case there was evidence about impending mergers, top-line financial information being exchanged days before earnings reports, and advance notice of Warren Buffett’s multi-billion dollar deal to rescue Goldman Sachs.”

Rajaratnam appeared to have crossed the line, in other words, from collecting cobwebs of rumors to illegal mining of weighty corporate secrets.

“You can imagine an analyst who meets with the same CFO each quarter and makes this phone call for six straight years for every quarter,” said Steven Feldman, lead white collar defense attorney at Herrick, Feinstein and a former assistant U.S. attorney in the Southern District. “One time he gets the same spiel but with slightly different language and slightly different intonation. Combining that insight with other pieces of research the analyst gathered – that would be the real mosaic theory.”

Mr. Feldman said he expects the appeal battle will prove just as important as the district court trial: whereas in the latter Mr. Rajaratnam’s defense team had to argue the facts of the case, now it will likely argue about the legality of the evidence.

“If he wins the argument that the wire tap was illegal that could be a big game changer,” said Mr. Feldman. “Then they would throw out all the key evidence. They would throw out the trial verdict. The prosecution’s case would be decimated. By going to trial, Raj preserved the right to make an appeal to the Second Circuit. If he had pleaded guilty, he would have lost that opportunity.”

Elliott Lutzker, a former attorney with the SEC division of enforcement who is now a partner in the corporate and securities group at Davidoff, Malito & Hutcher, thinks it’s improbable that the wire taps would get thrown out. “The fact that the wire taps haven’t been used other than very infrequently doesn’t make them improper,” he said, adding that what’s good enough for the mob is good enough for Wall Street’s bad guys. “A court has to authorize them and there was reasonable cause to authorize them.”

Mr. Lutzker concluded that with Rajaratnam’s verdict “the chickens had come home to roost.”

“In the jurors’ mind the public just wants to see some people go to jail,” said Mr. Lutzker. “So you can expect very long sentences with no leniency.”